Let’s discuss the long term. Gold and oil are headed back up, for all the familiar reasons.
Really, it’s not like anyone is finding new large gold or oil deposits out in exploration land. Indeed, a whole lot of looking is leading to not very much finding in the exploration patch.
The big gold miners are pulling ore out of the ground. But generally, they are not replacing their mined reserves through reserve growth or resource expansion. To the extent that the mining companies are expanding reserves in the short term, it’s by digging deeper. And that raises the cost structure for production.
Rising production costs are eating into profitability. So in the medium to long term, the big guys will have to find new reserves by digging on Wall Street, if not on the TSX Venture Exchange. There is already some takeover activity occurring, but it has been hamstrung by the broken world banking system.
It’s the same thing with the large Western oil companies. It’s a rare oil company that replaces its annual output with new reserves.
Compounding the problem, much of the world is off-limits to the traditional exploration and production model. The large national oil companies (NOCs), such as Saudi Aramco, Sonangol, Petroleos de Venezuela, Gazprom, Rosneft, etc., control the bulk of the world’s resources. About 85% of the world’s oil and gas reserves are controlled by NOCs. About 7% of the world’s hydrocarbon reserves are controlled by the Western companies.
The Washington Post -- in an editorial, no less -- was downright sympathetic as it described the difficult operational scenario for Shell Oil Co. on a major lease in the U.S.:
“The five leases that have made up the Shell Perdido project off Galveston since 1996 are not classified as producing. Only when it starts pumping the equivalent of an estimated 130,000 barrels of oil per day at the end of the decade will it be deemed ‘active.’ Since 1996, Shell has paid rent on the leases; filed and had approved numerous reports with the MSS [Minerals Management Service], including an environmentally sensitive resource development plan and an oil spill recovery plan that is subject to unannounced practice runs by the MMS; drilled several wells to explore the area at a cost of hundreds of millions of dollars; and started constructing the necessary infrastructure to bring the oil to market.”
The Washington Post concluded, “The notion that oil companies are just sitting on oil leases is a myth.”
So it’s tough out there in the field. It’s hard work to find reserves and lift them to the surface. There are rising production costs, and now the producers are selling into a declining market price.
Let’s get specific and discuss gold. The price of gold has tumbled lately. Look at the past 60 days in the gold markets.Ugh! The price of gold was moving up until mid-July. Since then, it looks as if gold fell off a cliff. If you were trading gold, you probably took a hit. And the gold mining stocks have fallen hard, as well.
So the recent gold chart looks bad. But how bad is it, really? Let’s look at the longer term. Let’s look back five years at the price of gold.
If you bought gold five years ago, aren’t you glad you did? Even at the current price of around $770 per ounce, gold is still selling for more than twice its price back in August 2003. Do you feel better now? At least I don’t feel as bad. Because what I see is a long-term rising price for gold.
Why is gold rising over the long term? Because the U.S. dollar is falling in value. Inflation is robbing you every day, as your cash in the bank loses purchasing power. This has been going on for many years. And the U.S. government will not significantly change its ways.
Long term, gold is headed back up. Now is your chance to pick up some bargains.
My best recommendation for precious metals is Hecla Mining Co. (HL: NYSE) . Hecla mines a lot of silver, but plenty of gold, lead and zinc.